Regulatory Disclosures September 30, 2016
Scope of Application This Regulatory Disclosures Report provides the following qualitative and quantitative disclosures relating to Wealth One Bank of Canada (the Bank): Disclosures related to the Bank s lending portfolio, some of which relate to disclosure requirements outlined in OSFI's Guideline B-20, 'Residential Mortgage Underwriting Practices and Procedures'; and The Bank s Basel III Pillar 3 regulatory capital disclosures. The amounts disclosed in this document are based on the Bank s interim financial statements, which reflect its financial position and results of operations. The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), including the accounting requirements specified by the OSFI, and reflect, where necessary, management s best estimates and judgments. This report is unaudited. Overview Wealth One Bank of Canada is a federally regulated Schedule I chartered bank and is under regulatory supervision by the Office of the Superintendent of Financial Institutions Canada (OSFI). Public operations commenced during September, 2016. The Bank specializes in residential/commercial mortgages and deposit products. The Bank currently serves customers in Ontario and British Columbia. It does not offer products or services in foreign jurisdictions. Governance CORPORATE GOVERNANCE The Bank maintains a rigorous corporate governance structure. It is governed through its Board of Directors (Board), which is comprised of ten directors, of whom six are independent directors. The committees of the Board are comprised of independent directors and their responsibilities are described below. Governance, Conduct Review and Human Resources Committee (GCRHRC) Governance, board evaluation and compensation matters Conflicts of interest and Conduct Review, code of conduct and regulatory compliance Human resources, performance management and compensation Audit and Risk Committee (ARC) Financial management, reporting and internal and external auditor appointment and evaluation Risk management policy, effectiveness and reporting, including definition of the Risk Appetite Statement The Board and both of its committees hold meetings at least five times annually. 2
OPERATIONS GOVERNANCE Management oversight is effected through the committees listed below. Senior Management Committee (SMC) which has the following responsibilities: Business strategy development Operating and business plan development Execution and monitoring of banking operations and administration of the Bank Oversee risk management Treasury Committee (TC) which has the following responsibilities: Overseeing management of liquidity risk, interest rate risk, investment risk, and other aspects of Asset Liability Management Ensuring that the Bank has the appropriate quantity and quality of capital Monitoring pricing and treasury activities Credit Committee (CC) which has the following responsibilities: Ensuring compliance with operational mandates, policies and procedures, and governing legislation Providing guidance on the methodology to continually identify, define, assess, manage, and report credit risk and exposure planning, directing, monitoring and controlling the impact of the Bank s risks arising from its operations The Bank also has oversight functions which include an Internal Auditor, a Chief Risk Officer, a Chief Compliance Officer and a Chief Anti-Money Laundering Officer that report directly to the CEO and Board committees. The Board seeks to achieve long-term sustainable risk adjusted growth to ensure the health of the Bank and the stability of earnings while protecting the Bank s reputation and the interests of its depositors, customers and investors. The Internal Auditor assists management in accomplishing its objectives by bringing a systematic, objective and disciplined approach to evaluate and improve the effectiveness of the Bank s risk management, control and governance processes. Capital Structure and Capital Adequacy The Board has developed and approved a Capital Management Policy (CMP) in accordance with the Boardapproved Risk Appetite Statement (RAS). The Policy addresses minimum regulatory capital requirements as prescribed by regulators and internal capital targets as per the Board-approved RAS, which allows for the appropriate allocation of capital to meet the Bank s strategic goals. The CMP dictates that adequate capital be maintained by the Bank. Adherence to the CMP ensures that the Bank has sufficient capital to maintain its operations based on current activities, expected future business developments and the possibility of various disruptive or adverse scenarios based on the Bank s stress testing program. Such stress testing scenarios include periods 3
of economic downturn and/or asset re-pricing. In addition, in accordance with the Bank s annual strategic planning, a 3-year forecast is prepared and provides guidance as to the type and extent of capital that will be required over the forecast period. The overall objective of capital management is to ensure that the Bank has sufficient capital to maintain its operations based on current activities and expected business developments in the future and to provide a return to its shareholders commensurate with the risk of the business. The Bank s Treasury Committee ensures adherence to the policy on at least a monthly basis and the ARC monitors capital management in accordance with the Policy. The Bank uses the annual Internal Capital Adequacy Assessment Process (ICAAP) to determine the quantity and quality of capital to conduct its business activities. In preparing the ICAAP, the high risk areas established in the Enterprise Wide Risk Management Framework (EWRMF) are subject to stress testing which incorporates assumptions established in the annual strategic planning process. The results of the stress tests help to determine the quantum of capital required to enable management and the Board to set capital levels appropriate with the Board-approved RAS. The ARC is responsible for reviewing capital management plans recommended by Management. The ICAAP is reviewed by the ARC and approved by the Board. The Bank s capital resources consist of common shares. The Bank s regulatory capital requirements are specified by OSFI guidelines. These requirements are consistent with the framework of risk based capital standards developed by the BCBS and are referred to as Basel III. The Bank complies with Basel III capital requirements as required by OSFI. The Bank s capital structure, risk-weighted assets, capital and leverage ratios, as of September 30, 2016 are detailed in the table below. 4
Modified Capital Disclosure Template All-in Transitional Common Equity Tier 1 capital: instruments and reserves 1 Directly issued qualifying common share capital (and equivalent for non-joint stock companies) plus related stock surplus 50,000 2 Retained earnings (9,862) 6 Common Equity Tier 1 capital before regulatory adjustments 40,138 28 Total regulatory adjustments to Common Equity Tier 1 (732) 29 Common Equity Tier 1 capital (CET1) 39,406 39,699 44 Additional Tier 1 capital (AT1) - 45 Tier 1 capital (T1 = CET1 + AT1) 39,406 39,699 58 Tier 2 capital (T2) - 59 Total capital (TC = T1 + T2) 39,406 39,699 Total Risk Weighted Assets 60 Total risk weighted assets 3,160 3,453 Capital ratios 61 Common Equity Tier 1 (as a percentage of risk weighted assets) 1,247.03% 1,149.70% 62 Tier 1 (as a percentage of risk weighted assets) 1,247.03% 1,148.70% 63 Total capital (as a percentage of risk weighted assets) 1,247.03% 1,149.70% OSFI all-in target 69 Common Equity Tier 1 capital all-in target ratio 7.00% 70 Tier 1 capital all-in target ratio 8.50% 71 Total capital all-in target ratio 10.50% 5
The Bank fully applies the Basel III deductions to calculate the leverage ratio as per OSFI s Leverage Requirements Guideline. The table below details the Bank's leverage ratio position under Basel III leverage requirements as of September 30, 2016. On-balance sheet exposures 1 Item On-balance sheet items (excluding derivatives, SFTs and grandfathered securitization exposures but including collateral) Leverage Ratio Framework 53,484 2 (Asset amounts deducted in determining Basel III "all-in" Tier 1 capital) (732) Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of 3 52,752 lines 1 and 2) Derivative exposures 4 Replacement cost associated with all derivative transactions (i.e. net of eligible cash variation margin) 5 Add-on amounts for PFE associated with all derivative transactions - 11 Total derivative exposures (sum of lines 4 to 10) - Securities financing transaction (SFTs) exposures 16 Total SFTs exposures (sum of lines 12 to 15) - Other off-balance sheet exposures 17 Off-balance sheet exposure at gross notional amount - 18 (Adjustments for conversion to credit equivalent amounts) - 19 Off-balance sheet items (sum of lines 17 and 18) - Capital and Total Exposures 20 Tier 1 capital 39,406 21 Total exposures (sum of lines 3, 11, 16 and 19) 52,752 Leverage ratios 22 Basel III leverage ratio 74.70% - 6
Risk-Weighted Assets The following table provides a breakdown of credit and operational risk exposures as of September 30, 2016. Gross Exposure Risk Weighted Assets Deposits with Regulated Financial Institutions $ 9,477 $ 1,895 Government issued or guaranteed securities 42,195 - Retail residential mortgages - - Other retail - - Other assets 1,812 877 Total credit risk 53,484 2,772 Operational risk - 388 Total risk weighted assets $ 53,484 $ 3,160 Risk Management Risk management is the subject of the Bank s Enterprise Wide Risk Management Framework (EWRMF). Its goals are to ensure that the outcomes of risk taking activities are consistent with the Bank s strategies and risk appetite and that there is an appropriate balance between risk and reward in order to maximize the Bank s profitability. The Bank s EWRMF provides the foundation for achieving these goals. The EWRMF helps ensure effective reporting and compliance with standards, while enabling the Bank to manage uncertainty and associated risk and opportunity. A component of the EWRMF is the Risk Appetite Statement (RAS), which defines the targets and absolute limits of risk that the Bank is willing to accept in its operations. Both the EWRMF and the RAS are reviewed by ARC and Board approved based upon the recommendation of the ARC. The ARC is responsible for overseeing the types of risk to which the Bank may be exposed and of the techniques and systems used to identify, measure, monitor, report on and mitigate those risks. The Bank does not maintain a trading portfolio and has minimal market risk from its high quality liquid asset portfolio. Further, the Bank does not have any equity portfolio or banking book and is not exposed to equity risk. The Bank s business EWRMF and the scope of its operations define the most material risks faced as described below. Strategic Risk The Bank is one of Canada s newest financial institutions and has identified a strategic niche that it believes is underserved. The Bank believes that it can establish a competitive advantage through pursuing its business model, operating practices and marketing network. 7
Funding and Liquidity Risk Funding and liquidity risk can occur due to the uncertain timing of cash flows and the Bank s reliance on raising funds by the issuance of deposits. The Bank has various funding sources and has created policies and procedures to ensure that cash flows are accurately predicted and monitored. It also maintains sufficient liquid assets to fund its anticipated loan commitments, operations, deposit maturities and interest payments should a shortfall arise. Credit Risk Credit risk is the potential for financial loss if the assets as currently reflected on the Bank s balance sheet become impaired and not fully recoverable. This can result from a significant and persistent drop in the value of assets supporting the loan/mortgage and/or customers choosing not to repay their loan/mortgage for an extended period. To mitigate risk, the Bank has developed underwriting criteria which provide reasonable loan to value ratios for the borrower while seeking to provide assurance that the value of the related asset is sufficient to repay the loan/mortgage. The Bank uses the Standardized Approach to measure credit risk. Interest Rate Risk The Bank s operating margin is primarily derived from the spread between interest earned on the investment and lending portfolio, and the interest paid on the debt and deposits used to fund the portfolio. Risk arises from the Bank s assets and liabilities having mismatched re-pricing dates, or being referenced to different underlying instruments. The Bank has adopted practices to manage the spread between interest earned on assets and interest paid on the instruments used to fund them. The Bank has defined its target appetite for interest rate risk as follows: Economic Value - 2.5% loss of Regulatory Capital for a 200bps parallel shock to interest rates Net Interest Income Sensitivity - 10% loss of annualized net interest income for a 200bps parallel shock to interest rates. The Bank recognizes that managing interest rate risk is a vital component of an effective treasury risk management program. However, during the start-up phase of the Bank, the Net Interest Income Sensitivity test will be less meaningful when the Bank s interest earning portfolio is modest. As a result the Bank has determined that the Net Interest Income Sensitivity Risk Metric will be applied when forecast net interest income is equal to or greater than $5 million annually. As at September 30, 2016 the impact of a 200 bps parallel shock to interest rates is as follows: Increase of 200 bps Decrease of 200 bps Economic Value (as a % of regulatory capital) (0.69) % 0.70 % Net Interest Income Sensitivity (as a % of net interest income) 43 % (42) % 8
Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It is the chance of unexpected income losses or increased costs that may emerge from human, process or system failure and due to external developments. Operational risk includes legal risk and information technology risk, including cybersecurity risk. The Bank uses the Basic Indicator Approach to quantify its exposure to operational risk. Regulatory Compliance Risk Regulatory risk arises from a financial institution s non-compliance with applicable laws, rules, regulations and prescribed standards in any jurisdiction in which the institution operates. The Bank addresses regulatory requirements in a timely manner to ensure it is compliant with new applicable regulations. The Compliance Department keeps the management team and the Board informed of new regulations, guidelines and changes to existing regulatory requirements. Management is aware of the potential negative effects of media and reputation risk exposure. The Bank has implemented complaint and incident resolution processes to mitigate these potential risks. 9
The Bank commenced public operations in September, 2016 and as at September 30, 2016 did not have any residential mortgage loans. The table presented below is for illustrative purposes to provide the form of reporting that will be provided in accordance with the requirements of OSFI Guideline B-20 Residential Mortgage Underwriting Practice and Procedures. Type Insured vs Uninsured 1 Total Residential Mortgage Portfolio Principal Balance Principal Balance Principal Balance Principal Balance Principal Balance Ontario British Columbia Rest of Canada Outside of Canada Total $ % $ % $ % $ % $ % Insured $0 0.0% $0 0.0% $0 0.0% $0 0.0% $0 0.0% Uninsured $0 0.0% $0 0.0% $0 0.0% $0 0.0% $0 0.0% Total $0 0.0% $0 0.0% $0 0.0% $0 0.0% $0 0.0% 1 An insured mortgage carries an insurance policy that protects the mortgage lender if the borrower defaults on payments or is otherwise unable to meet contractual obligations of the mortgage. Mortgages with an LTV greater than 80% require mortgage insurance. Average LTV 2 of Total Residential Mortgage Portfolio Ontario British Columbia Rest of Canada Outside of Canada % % % % % Insured 0.0% 0.0% 0.0% 0.0% 0.0% Uninsured 0.0% 0.0% 0.0% 0.0% 0.0% Combined 0.0% 0.0% 0.0% 0.0% 0.0% 2 LTV refers to the % of the mortgage loan to the value of the property being mortgaged and is a primary consideration in the underwriting process. Average Amortization of Total Residential Mortgage Portfolio Total <= 20 years > 20 to <= 25 years > 25 to <= 30 years > 30 years Total % % % % % Total 0.0% 0.0% 0.0% 0.0% 0.0% Economic Stress Test The Bank conducts regular stress testing of its residential mortgage portfolio to measure the impact of a severe economic downturn. Negative implications are managed through mortgage insurance on loans in excess of 80% LTV and prudent underwriting standards and practices. Stress testing is conducted utilizing a model and incorporates several assumptions. The primary assumptions are: * Canadian residential real estate values decline by 30% * Borrowers default on their mortgage loans at a rate 3 times the expected rate As of September 30, 2016 the stress test results indicate a potential loss of $0. 10